Edition: Mar - May 2014
Editorials

FINANCIAL SERVICES

Steady as she goes

A new regulatory ship is about to set sail. May the waters not be too turbulent.

There’s an abiding view that more regulation of financial services, the better for consumer protection. Were it only so in the past. Suppose that it will be in the future. The efficacy of regulation relates less to the creation of additional layers than to their capacity for improved enforcement. This in turn relies on competent personnel and systems, whose expenses are ultimately borne by the consumers requiring protection, as much as it does to perceptions of fairness amongst those being regulated, or their cooperation will be less than enthusiastic.

About to become law, as a precursor to introduction of “twin peaks” where the Reserve Bank and Financial Services Board are reconstituted respectively for prudential and market-conduct regulation, is the Financial Laws General Amendment Bill. Basically, it’s an omnibus piece of legislation. It amends almost a dozen existing statutes, including the Pension Funds Act and the Financial Services Board Act, which it moves to coordinate and streamline.

Its good intentions derive from the 2011 National Treasury document, ‘A safer financial sector to serve SA better’, so its principles have long been in the public domain. Over recent months, when it came to fleshing the detail, Treasury has been typically exhaustive in eliciting public comment.

Contentious issues remain. Two were highlighted from the floor at a Treasury presentation in January:

  • The passage of power from parliament to regulators. It’s about the nitty-gritty of regulatory authorities’ discretion to make rules, that have the status of law complemented by administrative penalties, and how they’re accountable for their buttressed operational independence;
  • Benefits to consumers should not be outweighed by the costs to protect them. For example, the FSB is funded by levies from financial institutions including pension funds. Will the revamped structures require higher levies? “All we can say is that staffing won’t require more people,” replied the Treasury presenter to snickers of scepticism around the room.

This bill affects all financial institutions: banks, life offices, the lot. In many ways, it’s a response to the worldwide financial crisis from which SA institutions did not emerge at all badly; something that isn’t broken apparently needs to be fixed. In other ways, it’s to curb consumer abuse; which raises concerns about balancing bureaucratic interventions and overregulation, possibly self-defeating in the costs of compliance officers being passed on to consumers, rather than adjustments to legacy issues subjected to reform in discussion with regulators as previously.

There’s an uncomfortable sensation that the institutions are being presented and policed as villains. Perhaps they are, given the global turmoil that brethren abroad have occasioned. The bill’s introduction speaks in one breath of strengthening financial stability and fair treatment of financial customers, implying threats to both that more regulation of institutions can overcome.

These are the same institutions, whose profitability will in any case be squeezed by heftier capital adequacy ratios for financial stability and investors’ security, on which regulators must depend for cooperation. They’re also the same institutions that have signed the Financial Sector Charter, now law, to promote from their resources such national objectives as access to financial services, enterprise development and targeted investments. There’re limits to the fatness of the golden goose.

Treasury has received screeds of responses, formally and informally, to the draft bill. Some have been accepted and some not. Now the dye is cast. So wait and see how, by trial and error, it all works out.

Also waiting in the wings for implementation are Treasury’s retirement-fund reform proposals and the FSB’s planned Retail Distribution Review (RDR). Both have intentions to protect consumers and lower their costs. Less well quantified is their impact, possibly adverse, on service providers’ bottom lines.

The first RDR, on which the SA version is modelled, has been operational in the UK for the past year. It embraces regulatory changes aimed at improving standards of financial advice and consumers’ understanding of investment fees.

Part of the RDR is that financial advisors and providers of online investment platforms charge their clients upfront fees rather than accept sales commissions from product suppliers. The aim is to remove “commission bias” whereby supposedly independent brokers and fund platforms push products that earn them the most commission, irrespective of their suitability for clients.

But the jury is out on whether the new transparency rules will increase or decrease the cost of investing in “clean funds” that strip out commissions paid to advisors and trading platforms. Under the rules as they are, advisors must separate their charges for new business from fund managers’ fees; from April, the rule will also apply to execution-only platforms.

Skandia, a European subsidiary of Old Mutual, has done some calculations. It tells the FT that, in more than half of all cases, buying into these funds will not work out cheaper.

Rather than the industry rocking, it’s being rocked. Whether for better or worse remains to be seen, from whichever vantage point that one is sitting.